An Empirical Investigation into the Underpricing of Initial Public Offerings in the Chittagong Stock Exchange

Md. Aminul Islam, Ruhani Ali, Zamri Ahmad

Abstract

Over the years, hundreds of empirical studies have been carried out and theoretical literature written to enhance people’s knowledge towards initial public offering (IPO), IPO underpricing, IPO flipping, IPO short profit, IPO long run underperformances; yet it is arduous for people to clearly understand the various issues related to IPOs especially with different types of equities in different industries and in different markets. The degree of underpricing varies from one issue to another. The degree of underpricing in the Bangladesh capital market is rather high compared to that of other Asian and advanced stock markets. This study analyzes the levels of underpricing in IPOs and its determinants of the Chittagong Stock Exchange (CSE). Key trends in the levels of underpricing and overpricing are highlighted out on a year to year, and industry to industry basis. Out of the 117 companies that were listed in the years 1995 to 2005, 102 (87.18%) IPOs were found to be underpriced, 13 (11.11%) overpriced while only 2 were accurately priced. The overall level of overpricing was 15.37% with a standard deviation of 18.89. Regression Analysis shows that offer size, and size of the company is positively related to the degree of underpricing. The industry type and age of the firm are found to be negatively related to the degree of underpricing. However timing of offer was found to have no significant influence on the degree of underpricing of IPOs in the Chittagong Stock Exchange.

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